NAFTA 2.0: a Very Bad Deal for Orange County




When Ross Perot likened NAFTA to a giant vacuum cleaner sucking jobs away from America to Mexico, California, as a separate country, would have comprised the 8th largest economy in the world.  Today, we’d come 5th.  We’ve grown a lot despite what Trump described as ‘the worst deal of the century.’

Trans-Pacific trade is the largest reason why we’ve grown, benefiting from vast trade networks linking North America with Asia: it is the ‘secret ingredient’ underpinning most California successes for decades.  ‘Silicon Valley’ may look like a creation of a host of immigrants and their children (Apple, Google, Tesla, Intel) – but California’s unique geographic position and climate makes it attractive for eyes throughout the greater Pacific. Housing? Many states restrict new homes – but ours are worth more than others because a billion+ people throughout the Pacific see great value in raising families in California.

NAFTA played a significant role in shaping modern California.  Linking two  of America’s three largest trading partners – Canada, $583 bn in total trade volume, and Mexico, $560 bn – set up a giant, semi-harmonized bloc that forced every trading partner across the Pacific to take note and respond.  Flows from Asia focus on reaching California first as the main gateway to America: most trade from China ($640 bn), Japan ($205 bn), and South Korea ($120 bn) relies heavily on California.

Yet while California benefits immensely from the world NAFTA helped create,  ordinary Californians often do not.  Large manufacturers have largely abandoned California for China (which has no free trade agreement with America); to a lesser extent, they’ve expanded in Mexico and other countries.  Sometimes new ‘specialty’ manufacturers replace them, offsetting the losses (e.g., if California produces fewer Fords and Toyotas, we can produce more manufacture Teslas); sometimes they do not.

Yet there are other costs: gridlock as that vast volume of trade flowing through California ports manifests as fleets of trucks moving through our freeways.  Jobs paying a recent high school grad enough to buy a house in Orange County are rarer than panda bears.  Poverty is shockingly widespread in California, despite the incredible prosperity our trade ties generates.

Some folks win and others lose from every trade deal.  For this one, unlike  NAFTA 1.0, Californians gain little/nothing – and Orange County loses.  Why?

  • Requiring 30% (later, 40%) of goods to be made in ‘high wage’ factories paying $16/hr encourages manufacturers to set up outside of California to best take advantage of possible savings from US-based manufacturing. California’s $15/hr minimum wage means they gain little from making products here – but it could help factories grow in Wisconsin, Ohio, Indiana, and other states looking to pay low wages to ‘temporary’ workers (who are scheduled to be replaced with robots anyway).  We’ll see few new factories in the OC in the next few years that set up here as a result of NAFTA 2.0 – most of what comes in will choose California as a base for other reasons.
  • Setting a 75% ‘North America’ point of origin requirement for autos and auto parts hurts suppliers, mechanics, car salesmen and others trading in vehicles and parts manufactured outside of North America.  Automakers like Toyota, Hyundai, and Honda built extensive trans-Pacific systems, and while they may build some parts or final assembly in America, every vehicle reflects contributions deeply touched by the trans-Pacific system.  The new rules complicate the process for importing goods, which will in turn hurt smaller manufacturers of all stripes, even if larger manufacturers can, in some cases, build systems to mitigate those costs.  A handful of OC-based suppliers may benefit slightly; most folks in the OC will lose.
  • New intellectual property rules, esp. on pharmaceutical products, increase the ‘exclusive’ term for new drugs from 8 to 10 years.  That could raise drug prices for Canadians and Mexicans, adding some profits to the largest pharmaceutical companies, but for most Orange County residents, the effect will mean little more than a modest price hike on drugs if they consider undergoing an expensive procedure in Mexico.
  • The big ‘new’ gains from NAFTA 2.0?  Dairy?  Wine?  Anyone know of a single Orange County winemaker or dairy farm that may benefit?

Californians need not see trade agreements per se as a threat: trade makes us prosperous as a state, and when given a set of rules, we compete more fiercely than anyone, while offering a reward of a wonderful place to raise a family that is more attractive than any other state.

But the balance of costs and benefits from the USMCA will hurt Orange County while offering little if any benefit to most of us.  We should have expected nothing else from Trump: he’s no friend to California, and especially not to Orange County.  Yet the shocking fact is we have a large number of very senior members of Congress from Orange County who should have managed to get something – anything – of value to the voters in Orange County.  Why did they fail to get anything that folks here might have wanted?

Royce, Rohrabacher: Don’t bother US!

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